Transcendental Market Fragments:
Long Term View:
The current leg down from the 2007 high is analogous to the 1937 leg down. However, while the 1937 leg down did not make a lower low in 1938, the current leg down has made a new low and appears likely to reach the lower support line at a minimum. Right now, that support line is just below 600 on the SPX. SPX closed Friday at 883.36, so there's substantial risk in the market at these levels. And, that support line cannot be guaranteed to hold on a test. The US government is technically bankrupt right now. It's virtually impossible for the debt to be paid down to a reasonable level within a reasonable timeframe. A drop below the long term support probably means the market will be retracing back to the 1994 trading range where support is technically solid. That's in the mid-400s for SPX, which is a likely target in 2 years.
Intermediate/Short Term View:
But, the market does not have to get to the mid-400's straightaway. When the government is acting as guarantor of most debts, public and private, and the Fed is printing money as fast as it can, there is temporary support against that inevitable decline, just as Mortgage Equity Withdrawals averted a repeat of the huge decline in the Thirties and actually lifted the market to new highs. Thus, the market has seen a massive rally off the lows of last quarter. I expect the rally to continue and the S&P to soar to the 1300 level (by the Fall of 2009) after the current short term correction (5%-10% downside remains) is over.
Gold:
Many are looking for Gold to soar. I think it will, but probably not immediately. The fundamental reason is that deflation has an icy grip on the economy right now and no amount of fiat money has been able to dent that force yet. The technical reason is that I believe that I should see a substantial amount of mining company accumulation (see chart to Vi above) showing up on my measures before the price of Gold takes off. Of course, this could be a first time. But, in all previous moves in the Gold price, the mining shares have shown sustained buying pressure before Gold has made its move higher. Right now, I've seen a big bounce in the mining shares, but that's from a deeply-oversold condition and current measures suggest that I am seeing more selling pressure into the rally than buying pressure. That's a sign that the smart money is either converting their gains to cash, or are getting short. As I said, it could be different this time and the smart money may be confused by the economy. It's the first time the market has had a deflationary depression in more than a half-century, so it's new to most. But, the odds are that the precious metals will get another leg down before that big surge to the upside so many are looking for.
And, that's what I think will eventually happen, assuming I don't get that 1-in-20 chance of a complete smash of the financial system. In time, the politicians will have to settle with its creditors and some kind of accomodation will be made, such as devaluing the dollar. That, and almost any other settlement which can be envisioned, will lead to a soaring price of Gold into the latter part of the next decade. Right now, though, the metals are caught in the deflation and the metals are not a hedge against deflation.
The turn in Gold will likely be signaled by strong accumulation starting to occur in the mining shares. So, while I might gain some insight from the news, the markets are likely to give me the best signals. For instance, while I can calculate the budget deficit, probably $2 Trillion, I won't know whether that's high enough to send interest rates soaring, an event which will force the day of reckoning with the US deficits. Perhaps China will continue lending the Treasury money to keep zombie banks alive, but not lending themselves. I don't know. The last big rise in interest rates started slowly. |
